NationalVOLUME 16 ISSUE # 18

Twisted facts about inflation

Prime Minister Imran Khan believes the media and the opposition are twisting the facts about inflation and prices are not as high as they are projecting. His approach is contrary to the ground realities and indicates people will have to live with crushing inflation in the remaining period of his term after facing the hardest times of their lives since his installation.

The fiscal indicators show the country is not out of a fiscal quagmire as its gross revenues are decreasing but expenditure is growing at a double-digit pace due to a 30pc increase in debt servicing. The government must focus on increasing its revenues and reducing its expenditure to put the country on a path to sustainable growth. According to estimates, inflation may cross above 10pc and the rate of unemployment will further jump by the end of the current fiscal year. Though prices are expected to come down in the next few years, yet the unemployment rate will continue to rise in the foreseeable future. It means more people will lose their jobs in the coming years. Pakistan’s economy, which contracted in the last fiscal year, is projected to grow by 1pc in this fiscal year 2020-21, according to the World Economic Outlook, released by the International Monetary Fund (IMF).

It is highly unjust to believe that prices are at a reasonable level in Pakistan and only the opposition and the media are twisting the facts. In fact, international reports suggest Pakistan as an exception in the South Asian region for having high inflation, in contrast to mostly a stable inflation rate in the region on the back of weak domestic demand and broadly stable currency markets. Flour and sugar crises and shortages and high prices of vegetables have made the lives of the common people miserable but the government is rubbing salt into their wounds by claiming that prices are not high. The State Bank of Pakistan (SBP) has projected full-year inflation in the range of 7-9pc while the International Monetary Fund (IMF) anticipates it at over 8.8pc for the year.

Data released by the Consumer Price Index proves people in Pakistan continue to pay higher prices, especially for food items, mainly due to supply constraints as the government has yet to overcome the shortage of essential commodities, like wheat, sugar and vegetables. Prices of flour and sugar have not stabilized even after their imports. The government remained in a state of denial over their shortages and claimed the crisis existed only in the media, which was hell-bent to malign its image. Prices of food have surged sharply in the country, but it did not damage the credibility of the government as did the flour and sugar crisis. The shortage was perhaps the last straw. The common people were already facing the toughest times of their lives in terms of rising living costs fuelled by record-high food inflation when the crisis occurred.

The World Bank pointed out Pakistan as an exception in the South Asian region for having high inflation, in contrast to mostly a stable inflation rate in the region on the back of weak domestic demand and broadly stable currency markets. It noted the regional outlook has deteriorated recently, and risks are tilted to the downside. Financial sector weakness will likely weigh on activity unless balance sheet vulnerabilities are addressed. For countries with elevated debt levels and large current account deficits, like Pakistan and Sri Lanka, an unexpected tightening in global financing conditions could sharply raise borrowing costs and lead to stops in capital inflows.

Growth in the region is expected to rise to 5.5pc, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh, and Pakistan. Significant depreciation of the Pakistani rupee resulted in inflationary pressures. Monetary policy tightening in response to elevated inflation restricted access to credit. The government retrenched, curtailing public investment, to deal with large twin deficits and low international reserves. Pakistan’s budget deficit rose more sharply than expected. Contributing factors were a shortfall in revenue collection, combined with a sizable increase in interest payments.

The bank expected macroeconomic adjustment in the country, including a continuation of tight monetary policy and fiscal consolidation. However, the lower growth rate forecast is in line with a similar decline in the global growth rate during the current year and 1.5pc decline in the South Asian region. Growth in Bangladesh is projected to remain above 7pc through the forecast horizon, growth in Pakistan is projected to languish at 3pc or less as macroeconomic stabilisation efforts weigh on activity.

According to the State Bank of Pakistan, it is vital for the government to continue to address the underlying structural vulnerabilities and put the economy on a balanced and sustainable growth trajectory. Besides, the government will have to accept the fact that prices are beyond the reach of the common man. It will have to take urgent measures to prove the opposition wrong. The government, especially in the Punjab and Khyber Pakhtunkhwa, where the Pakistan Tehreek-i-Insaf (PTI) rules, cannot absolve itself of profiteering, hoarding and black-marketing by retailers. It has left the people at the mercy of mafias while it does not require money to take action against them. People want more serious efforts from the government to bring down prices than banking on volunteers of the Tiger Force.

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